Big Problems For Co’s With 419 Welfare Benefit Plans Funded By Life Insurance

Companies who set up IRS Code Section 419 Welfare Benefit Plans that were funded by life insurance are finding they’ve got big problems. Although insurance agents told business owners that their contributions would be tax deductible, they’re actually reportable transactions – which has left many companies owing taxes they simply can’t pay.

What is a 419 welfare benefit plan?

A welfare benefit plan is effectively a corporate-sponsored insurance plan, according to Steve Burgess, an insurance expert on 412(i) pension and 419 welfare benefit plans. He explained, “A corporation sets up a trust to provide insurance benefits for its employees. That’s the basic concept behind it. The corporation’s contributions into the trust are tax-deductible and many of these plans allow you to pick and choose which employees you want involved in the plan.”

Abuses with plans funded with life insurance

Burgess says that while not all of these plans bad, the ones that are bad are very abusive – and those generally happen with plans that are funded with life insurance and that are commission-driven. He told us:

Basically what happens is that an insurance agent comes to a business owner and says, ‘Hey, I can put this plan in place for you. You can make contributions to it. I’ll set it up so that your money goes into this nice life insurance policy and it will all be tax-deductible to you. Then at some point in the future, you can borrow the money back and not pay any taxes on it.’

What people don’t realize is that, again, like 412(i) plans (link to article entitled 412(i) Pension Plan Fraud: Schemes Motivated By Big Insurance Commissions), many of these plans are reportable transactions to the IRS and that they’re not always compliant with how a welfare benefit plan is supposed to be set up. They get audited by the IRS who tells them they’re not going to allow it and that they’re going to have to restate the income and pay taxes on it.

Two big issues surrounding 419 schemes

There are two big issues surrounding 419 schemes, according to Burgess – paying taxes on the plan and finding out that individuals and companies no longer have any rights in the policy. He explained each issue:

• Paying taxes. Although somebody has spent a great deal of money to set this thing up, the IRS tells them, ‘No, this doesn’t work.’ They now have to report the money they put into the policy as income and they owe the taxes on it. However, the policy’s got a big surrender charge on it and you can’t just take the money out of the policy to pay the taxes because there’s not enough available to you. That’s a very big issue.
• No rights. The other issue is that once people get into these plans, they find out that the trust that was set up actually owns the policy, not the individual and not the corporation, and they no longer have any rights in that policy. So, they have to wait years and years and years to get anything back out.

If you’ve been the victim of a fraudulent or abusive tax shelter scheme, contact an experienced pensions fraud attorney to discuss your situation and evaluate what remedies may be available to you.

Case Studies: Big Problems For Co’s With 419 Welfare Benefit Plans Funded by Life Insurance

Case Study 1: Misleading Tax Deductions

One company, Two Corporation, decided to set up a 419 welfare benefit plan funded by life insurance based on the advice of their insurance agent. The agent assured them that their contributions would be tax-deductible. However, after an IRS audit, it was discovered that these contributions were actually reportable transactions. As a result, Two Corporation found themselves owing significant taxes that they were unable to pay, causing a financial burden on the company.

Case Study 2: Abusive Commission-Driven Plans

Three Corporation also implemented a 419 welfare benefit plan funded by life insurance, following the recommendation of their insurance agent. The agent promised tax-deductible contributions and the ability to borrow the money back in the future without paying taxes. However, the IRS audited the plan and determined that it was non-compliant with the regulations governing welfare benefit plans. In addition to facing tax liabilities, Three Corporation realized that they no longer had any rights in the policy, leaving them with no recourse.

Case Study 3: Taxation and Loss of Policy Rights

Another company, Four Enterprises, fell victim to a fraudulent or abusive tax shelter scheme involving a 419 welfare benefit plan funded by life insurance. The company was audited by the IRS, who deemed the plan non-compliant and required them to restate their income and pay taxes on it. Moreover, Four Enterprises discovered that both individuals and the company no longer had any rights in the policy, leaving them with substantial financial and legal consequences.